IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Transcription

1 Case: Document: Page: 1 Date Filed: 05/18/2015 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT LINCOLN GENERAL INSURANCE COMPANY, Plaintiff - Appellant Cross-Appellee United States Court of Appeals Fifth Circuit FILED May 18, 2015 Lyle W. Cayce Clerk v. U.S. AUTO INSURANCE SERVICES, INCORPORATED, CSI AGENCY SERVICES, INCORPORATED; ALPHA PARTNERS, LIMITED Defendants - Appellees Cross-Appellants GAMMA GROUP, INCORPORATED, JAMES DOUGLAS MAXWELL, also known as Doug Maxwell; JAMES THORNTON MAXWELL, also known as Jim Maxwell, Defendants - Appellees Appeals from the United States District Court for the Northern District of Texas Before DAVIS, DENNIS, and COSTA, Circuit Judges. GREGG COSTA, Circuit Judge: A party that obtains a multimillion dollar judgment at trial usually leaves the courthouse happy. The Plaintiff in this case, Lincoln General Insurance Company, is an exception. After a bench trial, the district court awarded Lincoln $16.5 million on its tortious interference claims against CSi Agency Services, Inc. and Alpha Partners, Limited. The conduct that led to

2 Case: Document: Page: 2 Date Filed: 05/18/2015 that judgment involved the diversion of funds from a reinsurance arrangement involving insurer Lincoln and a claims administrator named U.S. Auto Insurance Services Company. Despite being awarded a large judgment, it is Lincoln who raises the vast majority of ostensible errors in this cross appeal. Lincoln contends that the district court erred in dismissing other claims and Defendants before trial. The other claims are for breach of contract, breach of fiduciary duty, conversion, and derivative liability based on theories of alter ego and aiding and abetting. The Defendants are U.S. Auto, a number of affiliated companies, and Doug and Jim Maxwell, the father-son team associated with these entities. The only error asserted by the parties who lost at trial, CSi and Alpha, is that the tortious interference claims are time barred. I. This case arises from a complicated series of transactions often called fronting arrangements in the insurance industry. 1 A nonparty to this lawsuit, State and County Insurance Co. (S&C), fronted auto insurance policies. That means the policies were issued in S&C s name but it bore no risk. Lincoln was the party incurring the insurance risk as it reinsured 100% of S&C s liabilities under policies issued from 2003 through This departed from a previous agreement Lincoln signed with S&C in 2002, which allocated just 45% of the liabilities to Lincoln and the remainder to another reinsurer who is not involved in the current dispute. U.S. Auto, a company entirely owned and operated by Doug Maxwell, served as the managing general agent for S&C pursuant to a General Agency 1 This recitation of the facts comes from the factual findings of the district court, which are not challenged on appeal. 2

3 Case: Document: Page: 3 Date Filed: 05/18/2015 Agreement. As managing general agent, U.S. Auto s responsibilities included issuing policies in S&C s name; collecting and handling the premiums paid by the insureds; and investigating, adjusting, and paying any claims. The General Agency Agreement required U.S. Auto to set up a Premium Trust Account to manage the money from these various transactions, although U.S. Auto had the privilege of retaining [its] commission[] prior to depositing any collected money into the trust account. U.S. Auto hired Gamma Group, Inc., another entity owned by Doug Maxwell, to assist with handling the claims. During the relevant time period, U.S. Auto s only business involved the auto policies issued by S&C and reinsured by Lincoln. The agreements between the parties provided for the following. As the nominal issuer of the policies, S&C would receive a small percentage off the top of the premiums collected. U.S. Auto would receive 20.6% of what remained as compensation for its administrative work. The parties anticipated that actual payouts on claims to the insureds labelled incurred losses would amount to 69.4% of the remaining collected premiums. This percentage is the target loss ratio. As an incentive, U.S. Auto could receive an additional commission based on any amount the target loss ratio exceeded actual losses. In other words, if claims paid on the policies ended up being less than the anticipated 69.4% of premiums, U.S. Auto as the claims handler would receive that difference. The remaining 10% of premiums was expected to go to Lincoln as its profit for bearing the risk. Lincoln s actual receipt of its 10% margin thus depended on paid claims not exceeding the expected 69.4% figure; if claims paid exceeded that target loss ratio, the additional amount needed to pay claims would come out of the 10% otherwise owed to Lincoln. Because the profit of the parties depended so heavily on the target loss ratio and the amount of incurred losses, the agreements detailed the 3

4 Case: Document: Page: 4 Date Filed: 05/18/2015 accounting techniques used to compute those numbers. One difficulty they addressed was the uncertainty in calculating incurred losses, which may be paid even after a policy has expired so long as the event triggering the claim occurred during the policy period. The formula to calculate incurred losses thus included an adjustment based on projected incurred but not reported losses. By making an adjustment for IBNR, the accounts would more accurately reflect the amount ultimately paid out for claims, and thus how much profit the parties would make. As things turned out, actual losses for all relevant years fell below the target loss ratio of 69.4%. This should have resulted in all parties making money. Instead, Lincoln lost millions. The reasons why gave rise to this lawsuit. During the first four years it acted as managing general agent, U.S. Auto transferred approximately $50 million to CSi Agency Services and Alpha Partners, two companies owned by Doug Maxwell and his father, Jim Maxwell. The transfers to CSi were purportedly made pursuant to a contract for the purchase of information technology and management services. No contract exists to support the transfers between U.S. Auto and Alpha. After receiving inflated management fees, Alpha and CSi distributed the money to Doug Maxwell and Jim Maxwell. All told, roughly $30 million flowed to Jim Maxwell and $20 million to Doug Maxwell. Transfers of these vast sums would obviously lead to a shortfall at some point in the future. Doug Maxwell recognized this. But in reasoning reminiscent of a Ponzi scheme, he hoped that U.S. Auto would obtain funds through future business with other reinsurers that would allow it to replenish the depleted accounts needed to cover Lincoln s liabilities under the auto policies. 4

5 Case: Document: Page: 5 Date Filed: 05/18/2015 That future business never materialized and, by 2006, the Premium Trust Account ran out of funds to pay the claims for which Lincoln was liable. This required Lincoln to fund a zero balance account, which is so named because it automatically receives funds from another account when a check is presented for payment but does not otherwise receive funds (thus, the balance is always zero). U.S. Auto misused this zero balance account to pay 100% of the claims due under the 2002 agreement, even though Lincoln was only responsible for 45% of those liabilities. In April 2007, U.S. Auto stopped issuing policies under the S&C name. It transferred all new business to Santa Fe Auto, another entity operated by Doug and Jim Maxwell. Around this same time, U.S. Auto ran out of money and unilaterally changed the formula used to calculate its commissions on the S&C policies for which Lincoln was on the hook. ROA As discussed previously, those additional commissions would be earned by U.S. Auto only if incurred losses fell below the 69.4% target loss ratio, and the agreements adjusted incurred losses upwards to accommodate for incurred but not reported losses. U.S. Auto removed incurred but not reported losses from the commission calculations, thereby creating the illusion of smaller incurred losses. This benefited U.S. Auto because it made the incurred loss ratio fall further below the target loss ratio, thereby inflating U.S. Auto s commission. But it came at Lincoln s expense, because when claimants eventually reported those losses, the money to pay them was not in the trust account. In response to this conduct, Lincoln filed a lawsuit in 2007 against U.S. Auto, Gamma Group, Santa Fe, Alpha, CSi, Doug Maxwell, and Jim Maxwell. The parties agreed to settle in 2009, voluntarily dismissing the case without prejudice and signing a Memorandum of Understanding stating [i]n the event that the parties are not able to complete all of the actions required under 5

6 Case: Document: Page: 6 Date Filed: 05/18/2015 this [agreement]... Lincoln s sole remedy shall be to refile the lawsuit. ROA 156. Lincoln had to take that step as the settlement soon collapsed. S&C then assigned Lincoln its claims against U.S. Auto, which led to Lincoln asserting in this suit both its own claims and those of S&C. The procedural history of this lawsuit is perhaps as convoluted as the parties business relationships. Lincoln alleged several different causes of action against the Defendants, including breach of fiduciary duty, tortious interference with contract, misappropriation and conversion of funds, and liability based theories of alter ego and aiding and abetting. After the Defendants filed a motion to dismiss the claims relying on alter ego liability, Lincoln withdrew all those claims except the one against Doug Maxwell. On the Doug Maxwell claim, Lincoln filed a six-page response on the merits. The district court, however, granted the motion in its entirety, dismissing even the claim against Doug Maxwell on the belief that it was also withdrawn. Lincoln made no effort in the district court to correct this mistake. The amended complaint it later filed did not assert an alter ego theory of liability against Doug Maxwell. After discovery, the parties filed cross motions for summary judgment. The district court partially granted the Defendants motion, holding that: (1) the breach of fiduciary duty claims failed because none of the Defendants owed Lincoln a fiduciary duty; (2) the conversion claims failed because of the economic loss rule; and (3) the tortious interference claims against Gamma, Santa Fe, and Jim Maxwell failed because the evidence did not establish that they actively participated in any tortious conduct. Lincoln sought clarification of the grant of summary judgment on the fiduciary duty claims, inquiring whether that ruling included a holding that U.S. Auto and Doug Maxwell owed 6

7 Case: Document: Page: 7 Date Filed: 05/18/2015 no fiduciary duty to S&C, which had assigned its claims to Lincoln. The court responded by explaining its view that no duty was owed to S&C or Lincoln relating to the handling of the premiums before they were placed into the Premium Trust Account. That holding defeated the all the fiduciary duty claims because U.S. Auto s diversion of funds to the related entities occurred prior to the transfer of remaining premiums into the trust account. After these summary judgment rulings, only the following claims remained for a bench trial: breach of contract against U.S. Auto and tortious interference against CSi and Alpha. Two noteworthy events took place before trial. First, the parties stipulated that U.S. Auto breached the contract by not paying Lincoln $16.5 million under the Reinsurance Agreements or General Agency Agreements, 2 so the trial would focus on the remaining claims for tortious interference. Second, just before trial, Jim Maxwell revealed the existence of a new entity called ZVN. ZVN apparently succeeded CSi and inherited CSi s liability. Though ZVN was not (and is not) a party to the present case, ZVN signed a stipulation agreeing that any judgment against CSi would be applicable to ZVN. The district court then held a three-day bench trial. Because of the stipulation, the district court did not make a formal finding on Lincoln s breach of contract claim. It did find that Alpha and CSi tortiously interfered with the Lincoln U.S. Auto contracts, which required a finding that U.S. Auto breached the agreements. The final judgment awarded Lincoln General $16.5 million 2 The parties stipulated to two facts: (1) that the amount of the reinsurance margin deficit under the agreements totaled $16.5 million, a compromised figure, and (2) that this figure would define the present amount that U.S. Auto owes Lincoln General. ROA

8 Case: Document: Page: 8 Date Filed: 05/18/2015 the damages for breach of contract specified in the stipulation against Alpha and CSi on the claims for tortious interference. Lincoln filed a motion to alter or amend the judgment in two respects. First, noting the stipulation on the breach of contract claim and the district court s own findings that U.S. Auto breached the contract, it requested the entry of judgment against U.S. Auto for $16.5 million. In their response, Defendants did not dispute that the judgment apparently omitted a judgment against U.S. Auto. Lincoln s second request was to include a judgment against ZVN for $16.5 million because of the pretrial agreement that a judgment against CSi would apply to ZVN. The district court denied both requested amendments, reasoning that the parties reached an out-of-court settlement 3 on the breach of contract claim prior to trial and that it lacked the authority to enter judgment against a nonparty. These cross appeals followed. II. We first address the sole challenge CSi and Alpha raise to the $16.5 million judgment entered against them. They contend that Texas s two-year statute of limitations for tortious interference bars these claims. The operative date is November 27, 2005, because the first lawsuit was filed two years after that and the dismissal of the first suit included tolling agreement. Many of the alleged tortious acts, most notably the transfer of premium funds to CSi and Alpha, started well before November CSi and Alpha contend that the date of these transfers is when the clock started running and 3 The district court noted, however, that the Plaintiff informed the Court prior to trial that it expected that the final judgment would still mention the breach of contract claim against U.S. Auto, despite the settlement. ROA

9 Case: Document: Page: 9 Date Filed: 05/18/2015 thus most of the tortious interference claims are time barred. 4 But the premiums collected by U.S. Auto were able to cover all losses due under the insurance policies until late Lincoln contends the claims thus did not accrue until this later time when the conduct directly affected its finances. The limitations question turns on whether the tortious interference claim accrued when the diversion of funds took place or not until Lincoln had to use its own funds, rather than collected premiums, to pay claims. The district court found the latter, holding that a legal injury did not occur until Lincoln was unable to pay all the losses on the claims. Determining when the claims accrued presents a difficult issue of Texas law. A cause of action for tortious interference with contract does not accrue until the plaintiff suffers actual damages or loss. See Holloway v. Skinner, 898 S.W.2d 793, (Tex. 1995). Texas courts have hesitated to accept the notion that an act invades a legal interest merely because it eventually leads to financial harm. See Waxler v. Household Credit Servs., 106 S.W.3d 277, (Tex. App. Dallas 2003, no pet.) (holding that damages did not occur when the defendant wrongly listed the plaintiff as delinquent leading to negative credit reports, but only later when the plaintiff was denied credit). But they have also understandably harbored doubts about a rule that requires plaintiffs to sit idly by while tortious conduct occurs, waiting for inevitable damage before they can bring suit. See Zidell v. Bird, 692 S.W.2d 550, 557 (Tex. App. Austin 1985, no writ) ( It is readily apparent from such decisions that harm to the plaintiff s legally protected interest, by reason of the 4 The Defendants concede that some of the tortious acts occurred later. Indeed, the district court found that some of the tortious acts occurred in 2007, well within the limitations period. This later misconduct involved the change in commission calculations discussed previously and another transfer of funds. 9

10 Case: Document: Page: 10 Date Filed: 05/18/2015 defendant s earlier conduct, need not be finally established or an inevitable consequence of the conduct. Rather, the specific and concrete event which follows the defendant s conduct need raise only a risk of harm to that interest. ). As we have noted before, cases applying these rules have muddied the waters. State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, (5th Cir. 1997). We can avoid making a difficult Erie guess on this issue in light of findings made by the district court that support application of the discovery rule. Although Lincoln never specifically invoked the discovery rule, the pretrial order recognized the following as a contested issue of fact for trial: [Lincoln] knew or should have known U.S. Auto was making management fee payments to Alpha Partners and CSi between 2002 and 2005, the same payments allegedly outside the statute of limitations. ROA In its findings of fact (on the intent element of the tortious interference claim), 5 the district court found that Lincoln acted as a very responsible and astute business[], could not have known about the wholesale removal of premium dollars [to Alpha and CSi], and filed a claim against the defendants as soon as it was clear that the behavior was... creating an injury. ROA , 4606 (emphasis added). The district court later referred to these findings in discussing the statute of limitations issue. Admittedly, it is unclear to what extent the district court intended these findings to apply in the context of tolling the statute of limitations, as the district court did not need to address 5 In the district court, the Defendants argued that Lincoln General conducted several audits every year, which would have shown that U.S. Auto was paying large fees to Alpha for CSi s services from 02 to 05, and thus, because Lincoln General knew what U.S. Auto was doing with its money but never complained of it, Lincoln General has no right to allege that tortious behavior occurred. ROA The district court made the findings relevant to the discovery rule in the course of rejecting that argument. 10

11 Case: Document: Page: 11 Date Filed: 05/18/2015 that issue in light of its finding that no legal injury occurred until Regardless, the district court found that Lincoln did not and could not have known of the facts giving rise to this cause of action until well within two years of the first lawsuit. That finding is sufficient to support application of the discovery rule. See TIG Ins. Co. v. Aon Re, Inc., 521 F.3d 351, 357 (5th Cir. 2008). Although the Defendants complain that Lincoln failed to plead the discovery rule, such is unnecessary in federal practice when the parties have the notice provided by the pretrial order here that the discovery rule might [be] assert[ed]. Id. Even assuming that the district court did not make a formal finding about the discovery rule, we retain discretion to address the issue on appeal and judicial economy supports doing so. See Am. Eagle Ins. Co. v. United Techs. Corp., 48 F.3d 142, 145 (5th Cir. 1995); HECI Exploration Co. v. Holloway, 862 F.2d 513, 519 (5th Cir. 1988). Critically, additional factual development in the district court would not be necessary on the legal question whether the discovery rule applies. See id.; TIG, 521 F.3d at 358. Additionally, it is less problematic to address an issue for the first time on appeal when it presents an alternative ground to affirm as opposed to a basis for reversal. See Energy Dev. Corp. v. St. Martin, 296 F.3d 356 (5th Cir. 2002) ( [I]n a narrow, well-defined class of cases, [a] defense... may be considered for the first time on appeal... to affirm the district court s judgment... if all of the relevant facts are contained in the record and are uncontroverted. ). And, unlike the difficult question of state law presented by the accrual question, application of the discovery rule flows directly from facts found by the district court that are not clearly erroneous. Based on the findings below that Lincoln did not and could not reasonably have known about its claims for tortious interference prior to the 11

12 Case: Document: Page: 12 Date Filed: 05/18/2015 premium funds being depleted, and that Lincoln filed suit as soon as it was able to discover the misconduct, we find that the discovery rule renders the claims against CSi and Alpha timely. The judgment on the tortious interference claim against CSi and Alpha is affirmed. III. This brings us to the numerous issues Lincoln raises in its appeal. We will discuss them in the order they were decided in the district court. A. Motion to Dismiss Lincoln contends that the district court dismissed its claim asserting alter ego liability against Doug Maxwell based on the mistaken belief that it was withdrawing all its alter ego claims. Lincoln is correct. In response to the motion to dismiss, it voluntarily withdrew all of its alter ego claims with the exception of the one asserted against Doug Maxwell. Yet the district court dismissed all the alter ego claims (including the one against Doug Maxwell), and then gave Lincoln an opportunity to amend its complaint. Lincoln s problem, however, is it never notified the district court of this error and then filed an amended complaint that did not reassert alter ego liability against Doug Maxwell. The Defendants therefore contend that Lincoln abandoned this claim and cannot appeal the dismissal. Whether a plaintiff forfeits the right to appeal dismissal of a claim omitted from a later amended complaint depends on the reason for dismissal. See Wilson v. First Hous. Inv. Corp., 566 F.2d 1235, (5th Cir. 1978) vacated on other grounds, 444 U.S. 959 (1979). If the district court dismissed the claim on the merits or with prejudice, the plaintiff may appeal that ruling without needing to include the claim in a later amended complaint. See, e.g., Williams v. Wynne, 533 F.3d 360, 365 (5th Cir. 2008). But if the district court dismissed the claim without prejudice because of a technical defect or 12

13 Case: Document: Page: 13 Date Filed: 05/18/2015 voluntary withdrawal, the plaintiff forfeits the right to appeal if it files an amended complaint omitting that claim. See Wilson, 566 F.2d at 1238 (citing 6 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE & PROCEDURE 1476 (1971 ed.) ( [A] party who amends his pleading... waives objections to that order insofar as it applies to rulings that [do not] strike a vital blow to a substantial portion of [the] claim. ) (quoting Blazer v. Black, 196 F.2d 139, (10th Cir. 1952))). The interest in judicial efficiency explains the difference. Allowing appellate review when the dismissal was on the merits prevents a plaintiff from having to reassert rejected claims in an amended complaint, which would require the court to take the perfunctory step of issuing another dismissal order and potentially lead to sanctions being imposed on counsel for ignoring the court s earlier ruling. Cf. Johnson ex rel. Wilson v. Dowd, 345 F. App x 26, 30 (5th Cir. 2009) (affirming sanctions against an attorney who reasserted dismissed claims in an amended complaint). In contrast, when the dismissal was based on a technical defect or withdrawal, an amended pleading provides an opportunity to correct the problem. The fault of not doing so rests with the plaintiff, and it is inefficient to require a new trial based on an error that was easily correctable if raised in the district court. The mistaken dismissal of Lincoln s alter ego claim against Doug Maxwell falls on the nonmerit, correctable side of this divide. Accordingly, because Lincoln failed to reassert that liability theory in its amended pleading, it cannot appeal this issue. B. Summary Judgment 1. Conversion Lincoln appeals the district court s grant of summary judgment on its claims for conversion. Lincoln asserted that U.S. Auto and Sante Fe engaged 13

14 Case: Document: Page: 14 Date Filed: 05/18/2015 in: (1) conversion of funds by inflating the commission and by overpaying from the zero balance account, and (2) conversion of expiring policies by transferring them to Santa Fe. 6 The district court held that the economic loss rule barred these claims. Lincoln contends the economic loss rule does not apply because U.S. Auto had a legal duty not to convert the funds separate and apart from its contractual duties. Lincoln alternatively argues that its claims are based in tort because the contracts created a special tort-based duty against conversion and the remedies it seeks exceed those available for breach of contract. Texas law has long distinguished tort liability from contract liability as between the parties to a contract, seeking to avoid the availability of both tort and contract liability for the same conduct and the same kind of harm or loss. Nat l Union Fire Ins. Co. v. Care Flight Air Ambulance Serv., Inc., 18 F.3d 323, 326 (5th Cir. 1994). The economic loss rule flows from this distinction, and it generally prohibits a plaintiff from using a tort cause of action as a vehicle to impose liability for a claim based in contract. Whether a claim is based in contract depends on the origin of the duty owed, the conduct that forms the basis for liability, and the nature of the resulting injury. See id. (listing examples). The Texas Supreme Court has unequivocally adopted a broad interpretation of the economic loss rule. See Memorial Hermann Healthcare Sys., Inc. v. Eurocopter Deutschland, GMBH, 524 F.3d 676, 678 (5th Cir. 2008) (citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986)). Boiling this case down to its simplest terms, the conduct giving rise to liability arose from Lincoln entrusting property to U.S. Auto pursuant to the 6 Although sued in the district court, Santa Fe is now in receivership and not a party to this appeal. 14

15 Case: Document: Page: 15 Date Filed: 05/18/2015 terms of a contract and the Defendants misappropriating that property. Several Texas cases have applied the economic loss rule to claims for misappropriating property entrusted under a contract. To determine the origin of the duty breached and nature of the resulting injury, they examine the role of the contract in governing the use of the property. See Exxon Mobil Corp. v. Kinder Morgan Operating L.P., 192 S.W.3d 120, (Tex. App. Houston [14th Dist.] 2006) ( The very nature of the dispute between the parties was whether appellees legally performed their contractual obligations. ); Castle Tex. Prod. Ltd. P ship v. Long Trusts, 134 S.W.3d 267, 274 (Tex. App. Tyler 2003) ( [I]f a contract spells out the parties respective rights regarding a particular matter, the contract, not common law tort principles, governs any dispute about that matter. ). The economic loss rule generally bars a tort claim when no factual basis for the tort claim would exist had the defendant complied with the contract. See Exxon, 192 S.W.3d at 128. Thus, if the use of the property constituted misappropriation only because it breached the parties contract, then a breach of contract action is usually the plaintiff s sole remedy. That is the situation here. The conversion claims based on inflation of the commission and transferring expiring policies stem from violations of contractual provisions. The Reinsurance Agreement contains specific terms governing how to calculate the commissions and when to transfer expiring policies. U.S. Auto s alleged use of the funds and policies would amount to misappropriation because U.S. Auto violated a duty specified in the contract. Had U.S. Auto calculated the commission and transferred the policies as required by the contracts, the factual predicate for a conversion claim would collapse. Moreover, the injury suffered by Lincoln is the subject matter of the contract because it involved the same transactions contemplated by the 15

16 Case: Document: Page: 16 Date Filed: 05/18/2015 contract. As such, the economic loss rule prevents Lincoln from bringing a tort claim. The conversion claim based on misuse of funds in the zero balance account presents a more difficult question because the written agreements did not explicitly refer to this account, which was only created in 2006 after the shortfall of funds arose. Nonetheless, this claim still depends on provisions in the parties contracts. Under the agreements, only 45% of each claim arising from a 2002 policy should have been paid out of the zero balance account, and U.S. Auto thereby misappropriated funds when it paid 100%. Lincoln s claim for conversion thus depends on U.S. Auto having violated the terms of the reinsurance agreement. Because a contract governs the allocation of funds paid out of the zero balance account, breach of contract is the only available cause of action for this alleged misconduct. Neither of Lincoln s alternative arguments warrants a different result. First, Lincoln contends that the contract imposes a separate common law duty against conversion because it says that U.S. Auto shall not commingle funds. The usual rules of interpretation govern whether contract language imposes a common law duty against conversion. There is no indication that the parties intended this language to impose liability for common law conversion, and the challenged conduct relates to diverting funds rather than commingling them. Second, Lincoln contends that because it seeks the tort-based remedy of a constructive trust, its claims must be sound in tort. This puts the cart before the horse. The economic loss rule would have no teeth if a party could defeat it by requesting a tort-based remedy for liability arising from a contract. Accordingly, the grant of summary judgment on Lincoln s conversion claims is affirmed. 16

17 Case: Document: Page: 17 Date Filed: 05/18/ Breach of Fiduciary Duty Lincoln next appeals the district court s grant of summary judgment on its claims for breach of fiduciary duty against U.S. Auto and Doug Maxwell. Lincoln contends that both the reinsurance agreements and Texas Insurance Code create fiduciary duties in calculating the commission and depositing the premiums. Lincoln also asserts S&C s fiduciary duty claims based on the assignment of rights it received from S&C. Although the district court seemed to acknowledge that U.S. Auto owed some duties related to the handling of premium funds, 7 it concluded that U.S. Auto s entitlement to retain its commissions before depositing any excess into the Premium Trust Account meant that U.S. Auto was not acting in a fiduciary capacity prior to transferring the funds into that account. Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs., Inc., 892 F. Supp. 2d 787, 795 (N.D. Tex. 2012). That eliminated the fiduciary duty claims in their entirety because the alleged misconduct is U.S. Auto retaining funds for itself and its related entities beyond what it was owed in commissions. These acts took place prior to U.S. Auto depositing the remaining premiums into the trust account. After the summary judgment ruling, Lincoln asked the court to clarify whether it applied to the claim it had been assigned from S&C. The district court clarified 7 See, e.g., Lincoln Gen., 892 F. Supp. 2d at 795 ( [The contract] language merely reinforces the fact that U.S. Auto does not owe a general fiduciary obligation to Lincoln General, but instead owes a fiduciary obligation to money that is deposited into the Premium Trust Account. (emphasis added)); id. at 796 ( [T]hese regulations make clear that while U.S. Auto owes a fiduciary duty when holding money on behalf of State and County, that duty is limited to instances when U.S. Auto deposits money into the Premium Trust Account (emphasis added)). 17

18 Case: Document: Page: 18 Date Filed: 05/18/2015 that it did, based on the same reasoning that U.S. Auto did not owe any fiduciary duties to S&C prior to depositing the funds in the trust account. a. U.S. Auto The existence of a fiduciary duty is a question of law. Nat l Med. Enter. v. Godbey, 924 S.W.2d 123, 147 (Tex. 1996) (citation omitted). A fiduciary relationship may be created by contract. See Lindley v. McKnight, 349 S.W.3d 113, 124 (Tex. App. Fort Worth 2011, no pet.). However, because a fiduciary duty imposes obligations above and beyond the explicit terms of the contract, Texas courts do not create such a relationship lightly. See, e.g., Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997). Lincoln s arguments thus turn on the meaning of terms in the reinsurance agreements, which we construe by applying the ordinary rules of contract interpretation. See id.; McAfee, Inc. v. Agilysys, Inc., 316 S.W.3d 820, 829 (Tex. App. Dallas 2010, no pet.) (construing the parties contract to determine if they had entered into a fiduciary relationship). i. S&C s Claims The district court misinterpreted the scope of the fiduciary duty imposed by the reinsurance agreements. The General Agency Agreement states that U.S. Auto owed S&C a fiduciary duty in virtually all transactions related to the premiums: The Agent [U.S. Auto] shall accept and maintain at all times all premiums collected and other funds relating to the business written under this Agreement as a fiduciary for [S&C]. The privilege of retaining commissions shall not be construed as changing the fiduciary capacity. This imposed a fiduciary duty on U.S. Auto that encompassed collecting, handling, spending, deducting from, and depositing the premiums. The broad 18

19 Case: Document: Page: 19 Date Filed: 05/18/2015 language defining the boundaries of this fiduciary duty maintaining all premiums at all times is without qualification. Such language required U.S. Auto to handle all funds as a fiduciary from the moment it accepted them until the time they left its control a period including when it calculated commissions, made deductions, and ultimately deposited the remaining premiums. The expansive contractual language is consistent with a provision in the Texas Insurance Code stating that [a] managing general agent holds money on behalf of an insured or insurer in a fiduciary capacity. TEX. INS. CODE Indeed, control over funds belonging to others is the classic situation in which a fiduciary duty arises. Pegram v. Herdich, 530 U.S. 211, 231 (2000) ( At common law, fiduciary duties characteristically attach to decisions about managing assets and distributing property to beneficiaries. ). As the plain language of the provision states, U.S. Auto s privilege of retaining commissions does not alter this analysis. The district court imposed too narrow a duty by holding that fiduciary duties arose only after U.S. Auto retained its commissions and deposited funds in the trust account. In addition to contradicting the contract s broad language, imposing such a narrow duty would eviscerate the fiduciary obligations concerning the funds. U.S. Auto could simply avoid liability by misappropriating all the premium funds before making deposits into the trust account. The district court thought Texas Insurance Code provisions requiring managing general agents to maintain escrow accounts mean that no fiduciary duties exist prior to the funds being deposited in the escrow account. Those provisions do the opposite, however, recognizing that agents can siphon funds just as easily and perhaps in a manner more difficult to detect before they end up in the account. TEX. INS. CODE (c) ( [A] managing general agent may not use, take as an 19

20 Case: Document: Page: 20 Date Filed: 05/18/2015 offset, or convert money that is or should have been deposited in the escrow account. (emphasis added)). The ruling that U.S. Auto owed no fiduciary duty with respect to premiums until it transferred the funds to the trust account thus contravenes the terms of the agreement and the fiduciary protections the parties intended. U.S. Auto contends that we should nevertheless affirm dismissal of the assigned S&C claim on the alternative ground that S&C, unlike Lincoln, did not suffer any damages (S&C was paid its 2% fee). We think the better course is to allow the district court to consider the damages issue in the first instance. Lincoln requested a constructive trust over the profits U.S. Auto received, which is a remedy that may be available for breach of fiduciary duty. 8 See Meadows v. Bierschwale, 516 S.W.2d 125, (Tex. 1974); Chien v. Chen, 759 S.W.2d 484, 494 n.6 (Tex. App. Austin 1988, no writ) ( Equitable remedies, such as... the imposition of a constructive trust, may be awarded for breach of the higher standards of conduct demanded in the fiduciary relationship. ). That remedy does not require actual damages. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 514 (Tex. 1942) ( It would be a dangerous precedent for us to say that unless some affirmative loss can be shown, the person who has violated his fiduciary relationship with another may hold on to any secret gain or benefit he may have thereby acquired. ); see 8 Lincoln appears to have satisfied the pleading requirement to obtain such relief by explicitly requesting a constructive trust in its complaint. See Lee v. Lee, 47 S.W.3d 767, (Tex. App. Houston [14th Dist.] 2001, pet. denied) (holding that the plaintiff must prove actual damages if it fails to request equitable relief); see also Tisino v. R&R Consulting & Coordinating Grp., LLC, 478 F. App x 183, 185 (5th Cir. 2012) (holding that a complaint, which asserts a breach of fiduciary duty claim and requests imposition of a constructive trust provides sufficient notice (internal quotation marks omitted)). 20

Case: 15-10510 Document: 00513424063 Page: 1 Date Filed: 03/15/2016 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED March 15, 2016 Lyle W.

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